Winning or losing in the low carbon transition
I must admit I’ve got a bit obsessive recently about the market disruption required for the low carbon transition. It’s a simple, but oft ignored, fact that you can’t create a low carbon economy without destroying the high carbon economy. I’ve tried my best to represent any technological transition diagrammatically above. A mature sector is trundling along quite happily, evolving incrementally when an emerging technology and/or societal shift changes everthing. “The New Normal” market will consist of successful new entrants (and a good proportion of these will fail) plus those in the mature market who manage to adapt one way or other to that new reality.
Those who fail to adapt will die. This is certainly the most difficult side of the equation for policy makers and/or politicians. Established businesses have political clout, they have resources to lobby, their workforces are more likely to be unionised and unions will strive to protect those jobs, and the press will always print a “major employer forced into bankruptcy by the woke green agenda” story over “here’s an exciting new start up which will deliver great products which won’t destroy your kids’ future.” Even environmentalists have been known to procrastinate over disruptive change in favour of ‘a just transition’, which may be an unachievable ideal. But if the industries won’t adapt, they will inevitably die.
The big question is how and when to make the change. I’m currently marking a gazillion student assignments from my guest lecturing last year. One of the exercises we did was “The Shell Game” where the students had to role-play different stakeholders in a semi-theoretical decision by Shell to either expand drilling into the Arctic or invest heavily in renewables. Every student I’ve marked so far has recommended the latter, but the more perceptive are teasing out some of the difficulties in making that transition. For example, what renewables should Shell go for when the low carbon transition is trending hard towards electrons, not more familiar molecules?
The automobile market is approaching this decision point fast. Globally, EV sales are the only growth area and the two biggest EV manufacturers by some distance, Tesla and BYD, are (relatively) new entrants into the sector – and they have never produced ICE cars. This creates an existential risk for traditional manufacturers who find themselves behind the curve. Jump too fast and they could fall flat, too slow and they will see their market gobbled up by the new kids on the block. I discuss this particular case with Prof Knut Haanaes of IMD in tomorrow’s podcast episode and (spoiler alert) there is no easy answer.
This creative destruction is where the transition is going to get tough and resistance will get more shrill. Grab your tin hat!